C&D International Investment Group (HKG:1908) shareholders are no doubt pleased to see that the share price has had a great month, posting a 34% gain, recovering from prior weakness. And the full year gain of 13% isn't too shabby, either!

All else being equal, a sharp share price increase should make a stock less attractive to potential investors. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). So some would prefer to hold off buying when there is a lot of optimism towards a stock. Perhaps the simplest way to get a read on investors' expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

See our latest analysis for C&D International Investment Group

C&D International Investment Group's P/E of 5.19 indicates relatively low sentiment towards the stock. The image below shows that C&D International Investment Group has a lower P/E than the average (6.2) P/E for companies in the real estate industry.

SEHK:1908 Price Estimation Relative to Market April 19th 2020

Its relatively low P/E ratio indicates that C&D International Investment Group shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with C&D International Investment Group, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. When earnings grow, the 'E' increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.

C&D International Investment Group's earnings per share grew by 3.1% in the last twelve months. And its annual EPS growth rate over 5 years is 89%.

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

C&D International Investment Group's net debt is considerable, at 278% of its market cap. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you're comparing it to other stocks.

C&D International Investment Group has a P/E of 5.2. That's below the average in the HK market, which is 9.6. It's good to see EPS growth in the last 12 months, but the debt on the balance sheet might be muting expectations. What we know for sure is that investors are becoming less uncomfortable about C&D International Investment Group's prospects, since they have pushed its P/E ratio from 3.9 to 5.2 over the last month. If you like to buy stocks that could be turnaround opportunities, then this one might be a candidate; but if you're more sensitive to price, then you may feel the opportunity has passed.

Story continues

Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

You might be able to find a better buy than C&D International Investment Group. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.

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What Is C&D International Investment Group's (HKG:1908) P/E Ratio After Its Share Price Rocketed? - Yahoo Finance